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Magical Disappearing Acts

Watch out for obscure ETFs that could suddenly close.

August 11, 2008

A horde of new ETF sponsors want your investment dollars, And they're eager to entice you with often ill-conceived and unnecessary products. And if the products don't catch on, their sponsors are quick to terminate them.

Investment firms view ETFs as a way to rake in money quickly without having to pay big salaries to analysts and experienced portfolio managers. If the ETFs attract enough money, "some of these smaller shops hope to get bought out," says Dustin Lewellyn, director of ETF products for Northern Trust.

The newbies know they can't compete with the likes of iShares and Vanguard because of the established players' superlow expenses, so they frequently create gimmicky funds that often don't track a real index. FocusShares, for example, offers an ETF that invests in companies that derive a substantial portion of their revenues from doing business with Wal-Mart. HealthShares offers a "Dermatology & Wound Care" ETF. Claymore invented a fund that invests in makers of vaccines and another that invests in "Sudan-free" companies.

Make that invested. In February, Claymore shuttered those two and nine other ETFs that didn't attract significant quantities of assets. Ten of the funds were less than a year old. XShares shut seven real estate ETFs in July, just 13 months after launching them. None added much to the existing roster of established realty ETFs.

Don't worry if an ETF you own winds up on the chopping block. It's not like a company going out of business -- you'll get your money back. It's mostly an inconvenience. And considering how silly some of these ETFs are, it might turn out to be a stroke of good fortune.